Coronation Asset Management has expressed “cautious optimism” about what Nigerians should expect in 2024. The asset management company approached market forecasts cautiously, considering the market’s volatility in 2023 due to the significant economic reforms initiated by President Bola Ahmed Tinubu.
“Cautious optimism” refers to a mindset or attitude that combines hopefulness with prudence or carefulness. It suggests a positive outlook or expectation for favourable outcomes while also acknowledging and being mindful of potential risks, uncertainties, or challenges that might hinder those outcomes.
It involves a balanced approach where one is optimistic but remains cautious or prudent in their expectations, actions, or decisions.
In the first edition of its Nigeria Weekly Update released on Tuesday, analysts at Coronation scrutinised the market with a focused approach, examining four pivotal areas set to significantly influence the country’s economic future.
They approached the market from various perspectives. Initially, they focused on the FX market, followed by analysis of the Nigerian Treasury bills and FGN bonds. Additionally, they assessed the FGN US dollar bonds and the outlook for the Nigerian Stock Exchange.
The exchange rate of the naira
On the exchange value of the naira, analysts were cautiously optimistic, with a strong belief that recent macroeconomic moves by the Federal Government to clear the backlog of FX demands will pay off. By pay-off, they mean to bring the rates at the parallel and the official market much closer.
The government’s efforts to clear a backlog of FX demands from local manufacturers and businesses led to borrowing over $2.5 billion from the Afrexim Bank, facilitated by the United Bank of Africa.
In addition to this loan, the government is actively trying to sell off dormant assets to boost the country’s revenue, a move seen as a necessary step to meet future dollar demands.
They mentioned, “Going into 2024, what are the prospects? There is not a lot to be gained by saying that the Naira is cheap in the official market and very cheap in the parallel market; this is not about fair value but supply and demand, at least for the time being.
“In October, measures were announced to sell forward government-controlled oil and gas production in order to raise money to satisfy the backlog of demand for US dollars. This appears to be happening, but it is taking time. We expect it will take a few months for the parallel rate to be brought into line with the official rate again.”
Treasury bill 2024 outlook
On the Central Bank of Nigeria’s Treasury bills, analysts were rather disappointed with its overall 2023 performance, as according to them, “by the end of December, 1-year T-bill rates had moderated to 11.77 percent, well short of the inflation rate (for November) of 28.20 percent (a rate that was 21.82 percent back in January 2023).”
For this year (2024), “The market is waiting for a clear signal from the CBN about rates, and we look forward to the T-bill auction due on Thursday, January 11 in this regard.
“A high rate—say, 20.00 percent per annum or above—might contribute to a fall in inflation, prompt investors to hold T-bills and FGN bonds, and persuade the market that fixed income returns will begin to deliver value again (once inflation comes down).
“Low rates would have investors looking for risk-related returns, such as NGX Exchange-listed equities, alternative investments, and US dollars.”
FGN Eurobond expectations in 2024
For FGN Eurobonds, sentiment from investors was positive following the earlier decision of President Tinubu to remove fuel subsidy and his bold attempt at liberalising the Naira/US dollar exchange rate market. A strategic major move that helped increase investor appetite for these Eurobonds.
More importantly, investors are most likely to increase their demand for these Eurobonds in 2024 following Standard & Poor’s and Moody’s upgrades to the country.
Moody in December revised its outlook on Nigeria to positive from stable.
“These policy changes, and those potentially to come, have raised the prospects of a fiscal and external improvement in the country’s credit profile,” Moody’s said in a statement. While S&P in August 2023 upgraded the country’s outlook from negative to stable.
Following this development, analysts projected a growing demand for federal government Eurobonds.
They said, “Going into 2024, we see reasons for investors to favour FGN eurobonds again, following upgrades to Nigeria’s outlook by two rating agencies. Our reasons? The first is that the FGN continues to look for ways to maximise its US dollar earnings where possible. The second is that the trajectory of US government bond rates appears to be downward, with the result that the value proposition of FGN eurobonds is set to improve.”
NGX expectation for 2024
On the NGX stock market performance, analysts were full of commendation following a stellar year where it delivered a year-to-date return of 45.90 percent. This makes it the fourth consecutive year since the market started this bullish run.
For its expectations for this year, they said, “How do things look going into 2024? To begin with, the month of January has a tendency to deliver a rally (nine of the last 15 have), though in the majority of cases it was possible to buy the market more cheaply later in the year.
“For the full year, it is clear that valuations are not as compelling as one year ago, and if bank stocks look cheap on a price-to-earnings basis, that is partly because of the US dollar revaluation gains they are set to report for 2023.
“On balance, the market is not as cheap as it was, but if interest rates stay low, there is still potential for moderate positive performance this year, in our view.”
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